Fractional Jets

Fractional Jets is a common term for fractional aircraft ownership. The first such program was launched in 1986 by NetJets, which continues to dominate the industry. Other providers include business jet operators CitationShares, Flexjet, [http://www.flightoptions.com Flight Options] . Fractional aviation is also available in non-jet aircraft, such as Avantair's fleet of Piaggio P180 Avanti aircraft, Plansense's Pilatus PC12 fleet, or AirSprint's combined fleet of jets [Citation XLs] and prop Pilatus PC12's.

With fractional jets, customers (referred to as "owners") buy a “share” of a plane, rather than an entire plane. The price is pro-rated from the market price of a full aircraft. Owners then have guaranteed access (50-400 hours annually, depending on share size) to that plane with as little as four hours’ notice. Fractional owners pay a monthly maintenance fee and an “occupied” hourly operating fee. The latter is charged only when an owner or guest is on board, not when the plane is flying to a pick up point, or returning to base after completing a mission.

Owners have access to the full fleet of planes and may upgrade or downgrade for specific flights. At the end of a five-year term, owners sell their share back to the company for fair market value (called "residual value"), less a remarketing fee. A variety of factors may affect the residual value calculation, and the bottom-line cost of a fractional jet is highly dependent on this process.

In Depth

The development of fractional ownership plans accelerated the adoption and broadened the reach of private aviation. Previously, the only way to consistently enjoy private aviation was to buy a jet, which then spent a substantial portion of its life in a hangar, collecting dust and maintenance bills. In 1986, Richard Santulli launched what is now NetJets. By offering a timeshare model with guaranteed availability, he lowered the cost and increased the utilization, creating a more valid and viable path to ownership for thousands. Suddenly, the benefits of plane ownership could be attained with less than the full cost – or commitment – of full ownership.

In the fractional model, customers purchase (or lease) a fraction of an aircraft, alongside numerous, anonymous others. Depending on the company, the plane may be split into 16ths or even 32nds of a fractional share. These fractions translate to a number of hours per year, with a full 100% share equating to 800 annual hours. Most shares are sold at the 1/16 (50 hours) or 1/8 (100 hours) level.

Although the plane is shared, owners are guaranteed access from any airport with just 4-48 hours notice, depending on the provider and plan. This is referred to as the “call-out” period.

In addition to purchase costs, owners pay a monthly maintenance fee to cover the cost of upkeep, upgrades, hangaring, pilot salaries and training. When using the plane, owners are also billed for the actual hours in flight, with 12 minutes tacked on for taxiing. The final cost component is fuel, which is often a surcharge above the hourly fee to account for price volatility.

An owner's share allotment is depleted for actual hours of “occupied flight,” plus taxiing, with a 1-2 hour minimum. Notably, owners are not charged for any non-occupied flight time that may be required by the logistics of travel: getting the plane to a departure point, and returning to its base after the flight. This is called variously “deadhead,” “positioning,” “ferry,” and “empty leg.”

In addition to the "owned" plane, customers gain access to other planes in the fleet. When desired, they may switch to larger or smaller planes on a set “interchange” formula. Access to a smaller plane is typically guaranteed, but larger plane guarantees may be conditional on the size of one's share -- typically 1/8th or greater. There may also be limits to the percentage of an owner's total annual hours that can be flown with exchanged hours.

All shares are priced pro-rata, with no discounts for larger shares. In other words, a 1/8 share is twice as expensive as a 1/16 share, and half the price of a 1/4 share. The size of a share may dictate which additional benefits and rights the owner enjoys. Below is a list of possible benefits of larger shares.

*“Short leg” waivers – most plans require that each flight be a minimum of one hour. A waiver allows customers to be charged only for the actual flight time of a shorter trip.
*Availability guarantees – the strength of many guarantees increase with share size, for instance, shorter call-out periods and guaranteed access to larger planes.
*Overfly rules – some companies allow owners to access hours from future years if they’ve already flown their annual allowance.
*Ferry waivers – When flying outside of a provider’s “primary service area,” ownerslose certain guarantees and often have to cover the “deadhead” cost of moving the plane around. Some plans define secondary service areas, such as the Caribbean, where these expenses may be waived.
*Peak/Busy period access – Some companies declare popular holidays and heavy travel dates as peak or busy periods. These dates can push the company’s logistics and business model to the limit. Accordingly, companies may reduce service levels by lengthening call-out periods, relaxing certain guarantees, and applying additional restrictions. These changes tend to be more stringent on owners with smaller shares or card members with smaller commitments.

This list illustrates the minutiae that are common in deciphering fractional programs. Even the details have details, and companies continually adjust their terms.

The Formal Agreement

Private air travel advisors can be of particular help with navigating and negotiating the so-called "boilerplate" fractional contract. In an article for Halogen Jets, [http://shaircraft.com/news/scnews.shtml#date0408c/"“Fractional Jet Primer: Navigating the Contracts”"] , CEO of Shaircraft Solutions, James Butler, discusses the most vital components of a fractional contract:

Binder/Deposit Agreement — If your provider is awaiting delivery of your aircraft, this is the document through which you put up a deposit to hold your share. Should
Purchase Agreement — This is the document through which you purchase your share from the provider.
Master Dry Lease Exchange Agreement — This is the document that governs the relationship among all fractional owners in the program.
Management Agreement — This is the document that governs the core issues of your investment; it tells you when you can fly, how many hours you can fly and what costs you’ll incur when you fly.
On the last point, owners rarely end up flying the specific aircraft in which they hold shared title. More likely, they will travel on other identical planes in the company’s fleet. This is a natural consequence of the fractional model: since many owners “pull” on the same plane, it’s likely that "their" plane is either in use by another owner, or that another plane is positioned in a more convenient location for deployment.

This fleet flexibility is one of the key benefits of fractional ownership over full ownership. Owners are never stranded when their plane is in the shop for maintenance, and owners enjoy the luxury of upgrading or downgrading to other fleet aircraft for special trip requirements.

Fractional terms are typically five years, after which owners sell their share back to the company for the then-current fair market value, less a 7% “remarketing fee.” The fee may be waived for renewals. You may also lease your share in a variety of configurations, depending on your tax and financial profile.

The “fair market value” calculation is a key consideration, and can dominate the overall cost-benefit analysis of the fractional ownership format. Many fractional owners were burned by the volatile market and geopolitical conditions of the early 2000s. This is an area where candor and transparency are essential in discussion with your sales representative, and all contracts outline an appeals process if you dispute their end-of-contract valuation. In a contribution to Business Jet Traveler's "Inside Fractionals" column, Shaircraft CEO, James Butler, offers advice to owners challenging providers' low share valuations: [http://shaircraft.com/news/scnews.shtml#date0405/"“Sometimes Fair Market Value Isn't So Fair""] ,

Reasons to Fly Privately

*Flexibility in destinations - Commercial air travel is generally reserved for the largest 500 airports in the country, with 75% of all traffic directed through the 30 major hubs. Private aviation broadens your prospective airports to over 5,000 in the U.S.

*General Aviation (GA) Terminals - Even at major airports, private planes are handled separately, with a special terminal that offers greater service, comfort and amenities.

*Flexibility in scheduling and flying - Depending on the program, private aviation can be available within 4-48 hours of your phone call. This availability is a core benefit of fractional jets.

*Airport process - Most airports allow you to skip the terminal and drive right up to your plane. Your bags go directly from car to plane.

*Time savings and in-flight productivity - These are frequently cited by clients as the dominant benefit, and come in three forms: gaining access to more convenient airports, scheduling flights according to one's dayplanner, and simplifying the process of getting in and out of planes and airports. Nearly all flights are nonstop, and there are none of the commercial hassle of layovers, connections and reboarding. In-flight time on a private plane is considerably more effective for conducting meetings, conference calls and brainstorming sessions.

*Business Entertaining - Private jets offer a special intimacy and prestige, and provide a unique environment for candid discussions and social bonding.

*Security - All pilots, crew and maintenance staff are required to have photo identification that can be verified on-the-spot. Each employee is typically subject to numerous background checks. Overall, general aviation lacks the passenger anonymity and sheer size that has made commercial aviation more of a target. A secondary security benefit stems from the owner's control of schedule and itinerary. A customer has the ability to quickly fly into emergencies that might require their on-the-ground attention, or to quickly depart from unpleasant surprises such as riots or political upheaval.

*Consistency - Unlike with charter programs, fractional owners travel in the same model of aircraft with each flight. Though they may upgrade or downgrade, they typically select one plane and stick with it. This provides familiarity and comfort.

*Five-star Service - Fractional jet programs provide on-call concierges to attend to all travel requests, and some non-travel needs. Food, beverages and media choices are all tailored for each mission.

*Ego - For many flyers, an unstated benefit is pride of ownership in a luxury of the highest order. Despite the fact that owners rarely travel in “their” plane, the provider works carefully to make them feel that whatever plane they’re traveling in is their personal plane. There are no company logos on the fuselage or the napkins. Guests may easily assume that the plane they’re boarding is fully owned by their host.

In July 2008, Shaircraft CEO and private air travel expert, James Butler, wrote an article, [http://jets.halogenguides.com/articles/1333-another-reason-to-fly-privately"Another Reason to Fly Privately"] highlighting the differences between commercial and private air travel.

Drawbacks

*Convenience - Being locked in to a plane, or even a class of plane, can mean not having the right aircraft for each trip (e.g. too many passengers, unable to land in certain airfields, unable to take off at certain high altitudes -- as is the case with many aircraft in places such as Telluride and Aspen). Also, as with all fractional ownerships, if your aircraft is unavailable for whatever reason (whether its occupied, under maintenance, etc.), the whole convenience of flying privately disappears.
*Cost - Private jet travel is expensive, and the fractional model can be the most costly option (when compared to memberships, charter brokerages, etc.). The plans are also complex, with multiple layers of cost that make it nearly impossible to calculate a realistic fully-loaded bottom-line per-flight cost. Owners are charged a monthly fee whether or not they fly, and the often-overlooked fuel surcharges can add up to over $1,000 per flight-hour. When owners sell their share back to the provider, the "residual value" calculation can vary substantially due to market conditions. Additionally, planes in fractional fleets tend to be flown harder, with more hours and takeoff/landing cycles than the average. This negatively impacts residual value.
*Flexibility - The purchased share is for a specific plane. Any variations for a specific mission brings additional costs and calculations. Plans are typically locked at five years, with sell-back forced at the end of term.
*Environment - Air travel is a particularly carbon-producing means of transportation, even when the emissions are spread across hundreds of passengers on a commercial airliner. Flying even a small jet for a few passengers is by far the most polluting transportation option available.

How the Fractional Jet Model Works

The original formula for fractional flight is similar to its present incarnation: customers purchase pro-rata portions of aircraft that are 100 percent guaranteed to be available. The fractional jet provider then purchases an additional 26 percent of capacity (over and above the fleet purchased by clients) to fulfill that guarantee. These extra planes brings the guarantee to 98 percent statistically. The last 2% of the guarantee represents holidays and other worst-case situations. To close this gap in the guarantee, the company relies on “supplemental lift” from charter -– either from affiliated companies, or trusted third-party charter operators. As more client-owners join, a network effect results in a reduction of expensive empty legs: with a critical mass of customers, the theory is that it becomes more likely that a particular trip can be accommodated with minimal deadheading. In reality, it is not clear how many aircraft is required to reach an efficient scale, whether it is 50 aircraft, 400 aircraft, or whether it ever happens.

Track Record

After twenty years, it is unclear that the model works in its current form. The original fractional model anticipated selling planes in 1/4 fractions, rather than the 1/16th or 3/32 fractions that have emerged. Each additional partial owner creates more demand and schedule chaos for each plane, particularly during peak periods. Further, the theory that a growing customer base will reduce empty-legs has proven limited. While there have been some improvements, the best-case “floor” of empty traffic is still above twenty percent of total traffic. Worst case for new operators can approach 50 percent.

According to Halogen Guides, which covers the industry, the initial assumptions underestimated the complexity, overhead costs and peak demands. This has been further impacted by the dramatic popularity of fractional card programs. The card programs place even more owners against each plane; each owner enjoying fully-guaranteed access with as little as a single-year, 1/32 share commitment. For instance, a 25-hour Marquis Jet card represents a 1/32 share ownership of a jet in the NetJets fleet (NetJets is the provider of aircraft for Marquis Jet). Instead of the original "worst case" of four owners requesting simultaneous Thanksgiving travel, 16-32 may do so for a single plane.

Finally, the burgeoning diversity of structural offerings (fractional ownership, fractional cards, charter cards, ad-hoc charter) creates an environment where clients may employ a portfolio of solutions, tapping each alternative depending on the cost profile of each trip. Certain trips can be most economically served by fractional, card or charter. If a client gets to cherry-pick for each trip, the fractional provider typically absorbs the least efficient travel.

Industry Orientation

According to a 2006 Halogen Guides Jets survey, not one company boasted of sustained bottom-line profitability. Even Warren Buffet’s NetJets lost $80 million in 2005, attributed to foreign expansion and U.S. efficiency losses (specifically, paying for higher cost charter flights when owner demand outstripped capacity). One strategic thrust has been the introduction of efficiency incentives to better align client behavior with operating efficiency. Some companies have resisted these programs: if fractional’s appeal is the simplification of flight, that appeal is reduced when accompanied by a host of special pricing adjustments and incentive programs. Despite this marketing challenge, cost concerns have resulted in numerous efficiency-driven programs.


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